Machine learning and artificial intelligence will help banks reduce regulatory compliance costs and incidents of bad advice, said Westpac Banking Corp chief executive Brian Hartzer, as the application of 'regtech' gathers pace around the globe.

Treasurer Scott Morrison said earlier this month the better use of technology in regulation will help the government better regulate financial services, improve productivity, competition and innovation, and deliver lower costs and more reliable protections for consumers and the economy.

In a speech to a Fintech Australia event in Melbourne, Mr Morrison pointed to Sydney-based start-up Red Marker, which is pioneering the application of machine learning and artificial intelligence to the world of regulatory compliance. Red Marker's application Artemis is already being used by around 20 Australian financial services licensees. It is understood Westpac is among them.

'Regtech', an amalgam of "regulatory technology", has become one of the most talked-about topics in global banking, with banks under pressure to reduce costs to preserve return on equity. In an interview after Westpac delivered its full-year results last week, Mr Hartzer said "expectations on financial institutions are rising in terms of how they conduct their business, and we are moving toward more of a 'prove that you haven't done the wrong thing' response, which is a philosophy embedded to the way we are thinking about our business."

Westpac CEO Brian Hartzer says it is not very appealing to throw lots of bodies at compliance.
Ben Rushton

"At the moment, we have to impose a lot of manual processes and there is a lot of second-guessing and double-checking, which raises costs," Mr Hartzer said. "But it is not very appealing to us to just throw lots of people at the problem of manually checking lots of documents. The idea of using technology to scan our data much more proactively is something we are already doing and certainly something that I think will grow."

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Red Marker was founded by Matt Symons, the co-founder of peer-to-peer lender SocietyOne, his wife Mandy Symons and Julian Broudou, a software developer. The professional education company Kaplan and financial services lawyer Claire Wivell-Plater have been early strategic partners.

Using proprietary natural language processing techniques, Artemis detects risky content as it is being created. It is currently being used to scan public information such as web postings and external publications, providing flags for legal and compliance departments about content which may breach the corporations law or ASIC regulations. It will be extended to statements of advice.

The technology, which replaces the often chaotic use of emails and spreadsheets, reduces licensee risk and opens up the opportunity to deliver tailored professional training solutions on a 'just-in-time' basis.

"The idea that you could teach machines to read any media type and automatically identify compliance risk was pretty out there when we started Red Marker," Mr Symons said. "Three years later with Artemis, we have show that it really is possible to dynamically identify risky content as it's being produced. It also seems that for people working in risk and compliance roles, this sort of vertical application of cognitive computing is actually really helpful.

"As the Treasurer identified, Australia has an opportunity to become a world leader in the emerging regtech space. But that will require effective collaboration between regulators, industry thought-leaders and entrepreneurs if we are to have a realistic shot at developing a robust regtech ecosystem."

Financial institutions around the world will spend more than $US70 billion on compliance annually and the costs for compliance and governance software across the global industry are expected to approach $US120 billion by 2020, more than half of which will occur in consulting and business services, Mr Morrison said.

Brian Knight, the CEO of Kaplan Professional, which provides financial adviser education to most of Australia's financial institutions, said his company's work with Red Marker in Australia has caught the attention of management in the US. The future of professional education was "just-in-time, short sharp bursts of learning", he said, which was "changing the way we thing about education".

"As advisers make mistakes or reveal gaps in their knowledge, we can link them to a just-in-time learning piece allowing them to take corrective action, and measure their improvements in the Red Marker engine. We have an opportunity to tackle the real problems for ASIC and the financial advice sphere into the future."